In theory, Enterprise Resource Planning (ERP) works perfectly. Demand is calculated and materials arrive just in time for manufacturing start dates. However, if this were true in practice, inventory would simply be a function of manufacturing lead-times and lot-sizes. But in reality, demand planning and inventory management are complicated by a variety of factors, both within your operations and in those of your manufacturing partners, or suppliers.
Fortunately, some of these issues are within your grasp to fix, especially with a proactive and collaborative approach with all involved. The following five steps can help drive down inventory levels and reduce excess and obsolete components.
- Include Factors Outside the “Normal” Forecast
Even after including characteristics such as seasonality, new product introductions and products going end of life, forecasts are still far from taking all relevant factors into consideration. In addition to considering trend data and seasonal issues, ask yourself: Are there any unusual factors affecting the forecast? These may include a sales incentive plant for a product line unknown to the forecasting group, a field service organisation shifting stocks at global hubs, or major engineering changes to products.
When reviewing the final demand forecasts submitted to your organisation, ensure there is an effective business process in place. This should be cross functional and include experts from the entire business, including sales, marketing, production and the field service. Senior managers with experience in analysing both expected and uncommon forecasting factors should be involved in the final review of any forecast provided to strategic suppliers or manufacturing partners.
- Narrow Your Forecast
Whether your company is manufacturing internally or building through a manufacturing partner, your forecast sets the stage for the supply pipeline. But forecasting dozens of products, each with multiple variants, reduces the chances of producing an accurate projection. While all products and variants have to be forecasted, make sure the most important variants get adequate attention, and that several factors are considered.
For example, when there is early evidence that demand will not meet expectations, companies mistakenly leave all demand in the forecast “just in case”. This demand eventually emerges as a past-due forecast and continues to create excess and potentially obsolete components.
The answer involves segmenting products according to where they are in their product lifecycle. Higher priority and newer products likely deserve more of a raw material buffer and demand will likely catch up to forecast. Shorten forecasts for less important products, or products nearing end of life.
Often, companies are unsure which products they are going to sell, they tend to over-forecast everything hoping that all of these products will ultimately ship to customers. While you may want to aggressively plan for a few key products in tough competitive environments, generously forecasting across the board runs the risk of excess inventory. There are ways to profile your products to find the right balance between aggressive forecasting, buffer strategies and customer lead-times, especially when products share custom (non cancellable and non returnable) components.
- Reduce Mismatched Sets
A mismatched set occurs when you, or your manufacturing partner, has most of the components to build a product, but inventory is still waiting for one or two missing parts. While supply and quality problems often create mismatched sets, the main issue is determining how to obtain additional parts inside lead-time when demand rises.
By consistently dropping new demand inside the extended lead-time of the product, the business increases its chances of generating mismatched sets. To avoid this, first determine the lead-time profile, which is the combination of transformation times, lead-time offsets and component lead-times. Then clarify where it is reasonable to add new demand without creating undue risk.
You are likely to avoid mismatched sets and successfully manage a fixed pool of resources if you prioritise. Decide which products you are willing to allow demand inside of lead-time. Manage products that do not make the cut, so new demand is rarely added inside of lead-time. The only exception to this rule is when you are certain you have a reasonable chance of receiving all of the parts.
- Manage Engineering Changes Quickly
In manufacturing, engineering changes are a fact of life. You can better manage these changes by communicating more proactively in your organisation and adjusting certain ordering programs to avoid creating excess and obsolete inventory.
Improved tools allow you to make valuable trade-offs when setting effective dates for engineering changes. At times, you may need to address serious quality or safety issues immediately. But for the most part, changes in engineering allow you to make improvements at a later date.
When deciding, make sure you have all of the information about the changing materials. Ask yourself: When will new materials be available? What old parts are available on-hand and on-order? What options exist for reworking or reusing old materials? What is the impact on lot sizes if we need to buy a few more old parts? With these answers, you can establish the date with the lowest inventory impact.
- Manage Buffers Efficiently
Companies who outsource manufacturing usually ask their manufacturing partners to set up buffers to address supply challenges, but they often lead to unwanted inventory. These buffers may be for components (VMI, SMI, RTF programs) or a finished product. Buffers literally buy flexibility. They are usually set up when business is going well and people want to avoid missing product shipments.
While OEMs establish buffers for good reasons, they do not continually manage them as the business changes. It is not until the market has turned or a product becomes end-of-life when companies realise a surplus of inventory exists. To prevent excess inventory and coordinated protection for a product, frequently monitor and manage your buffers.
In Summary
Companies can minimise inventory and better manage many of the factors that lead to inventory risk if they work collaboratively with their internal and external manufacturing stakeholders. Effective demand planning can also reduce inventory risks, excess and obsolete inventories.
• Include some often overlooked factors in your forecast to develop a successful demand plan, such as service and spares demand, and demand from sales or other promotions.
• Consider a products position in its lifecycle when forecasting to reduce the risk of unwanted inventory. For example, additional buffer stocks can be ordered for products recently launched.
• Prioritise products and decide the lead time profile while accommodating any changes to reduce the risk of mismatched sets
• Proactive communication, improved tools and close monitoring can help you successfully address inevitable engineering changes
• Managing buffers successfully requires targeting a product’s needs and adjusting as the demand profile changes
Better forecasting processes and robust business processes not only lower inventory risk, but allow you to meet your shipment goals and deliver better results.
By Gelston Howell, Senior Vice President, Sanmina Corporation
